Breaking Down Warning Signals from the Bond Market — ft. William Cohan

25:28What we're seeing over the past week is that he is bailing out or figuring out a way to make his rich friends happier than they were before. But meanwhile, everyone else, all the regular people, they're going to get burned. And just one interesting note, Goldman, on their earnings, they didn't mention the tariffs once. They didn't say the word tariff a single time. I think they probably want to position themselves as calm and unfazed by what's happening. But I think you have to assume that they probably are, to an extent, also actually a little bit unfazed by what's happening. because I think they have this backstop that regular people don't have, which is that volatility can be a boon for them in the form of trading revenues.

26:16And that's what we saw this last quarter. It's funny. My interpretation of that was it's a giant reach around to Trump that they don't even want to engage in the argument. And they're worried about his wrath. So they don't use the term. They just talk about volatility rather than saying, the ass clown has created economic uncertainty for all of us. I mean, I know David Solomon. I like him a lot. I think he's a great leader. I am incredibly disappointed across all corporate leaders who all wake up every morning, look at themselves in the mirror and say, hello, Mr. President. I bet 498 of the 500 Fortune 500 CEOs think there's a nonzero probability they should be president, that they're so fucking awesome that they'll be drafted to run for president.

26:56And the key attribute of a president is leadership. And leadership kind of comes down to one basic fucking thing, and that's doing the right thing, even when it's hard. And none of these guys are doing the right thing because it's hard to call out just how ridiculously damaging this is to America. There is such a lack of leadership across our Fortune 500 CEOs. We keep waiting. Everyone assumes that, you know, our corporate leaders are the best in the world. They're the best in the world of making profits. They have not demonstrated themselves to be great leaders. We'll be right back after the break for our conversation with William Cohen.

27:30If you're enjoying the show so far, be sure to give the Prof G Markets feed a follow wherever you get your podcasts.

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29:55Welcome back. Here's our conversation with William Cohen, New York Times bestselling author and founding partner of Puck. Bill, thanks for coming on. Great to be here. Thank you for having me again. So we talk a lot about the stock market. I think everyone talks a lot about the stock market, especially on this show. We talk a lot less about the bond market, which despite being much larger in terms of just asset size, I think is quite misunderstood compared to the stock market. So we wanted to have you on today to talk to us about bonds. You've been writing a lot about the bond market in the past couple of weeks.

30:35What we saw last week was a fluctuation in yields. We saw this explosion in the yield on the 10-year, and this was the thing that everyone was very concerned about. So give us an explainer on what happened to the yield on the 10-year, what happened to treasury yields in general last week, why it's important, and why everyone is so concerned about this. Markets are a confidence game. The financial system is a confidence game. I don't mean that in a negative way. I mean that in a positive way. It only works if people continue to have confidence in it. Stock market is all about confidence. You generally believe that a stock is going up or else you wouldn't invest in it or, you know, or you'd short it if you believed it was going down.

31:26But, you know, you have to have confidence that the financial statements are accurate. And, you know, that's why we have an SEC. We have regulators. You know, that's why they have to file and certify the financial statements. The bond market is also relies on confidence. So when the tariffs shenanigans begin, what I call the tariff palooza, began in earnest, there was an initial flight to quality. And what I mean by that is people sort of ran from the equity markets because they didn't know what the effect of these tariffs would be on corporate profits and people's confidence in the equity market and in the economy generally, whether we're going to have inflation and a recession or stagflation, whatever it was going to be.

32:17And so the initial impulse was to run to the safety of the treasury bond market. And when, you know, this tariff palooza started, the yield on the 10-year treasury was around 4%. And the next day or so, it rallied and the yield fell to like 3.85%, which, you know, is relatively low, especially over the last few years. And so there was this sense that people were seeking the safety of the Treasury bond market. But then once people began to realize what these exorbitant tariffs were all about and how convoluted it all seemed and how poorly thought out and how much inflation it might result in, the bond, the yield on the bond market began to move up precipitously and got to like four and a half percent, which was basically the largest and quickest move up in the 10-year treasury in like 37 years.

33:23So it really shook people's confidence in, you know, what is supposed to be the most sanctified, safest market that there is. While that was all happening, we're describing confidence being shaken. I was watching CNBC, I was glued to the TV, and everyone was talking about the possibility of a credit crisis or a credit crunch. That's sort of the endgame, it sounds like. You know, if yields explode, then it could trigger this credit crisis. explain to us what actually is a credit crisis what does that look like what does it mean on a technical level and why would it be so bad for our economy the whole world runs on debt i mean you know borrowings uh you know and the availability of borrowings lending money that you can borrow to buy a car, a house, finance an LBO, just finance your business on a day-to-day basis.

34:26And as long as there's the debt available at a price you're willing to pay, then, you know, the whole system, you know, works pretty well. What happens during a credit crisis or a credit freeze is that that availability of debt capital just dries up. Can't get it. You know, you can get it at exorbitant rates of interest, but, you know, most people won't pay that exorbitant rate of interest. So just pass on the purchase, pass on doing the deal, pass on the refinancing, whatever it is. And, you know, you know, the markets, I mean, one of the reasons I love the debt markets is because it shares so much information with you so quickly about risk.

35:17You know, it's a place where sort of risk hangs out and you can see it developing on a minute to minute basis. Like, you know, when it became apparent and I especially love, you know, the high yield bond index, because that's where, you know, high yield bonds, junk bonds are issued by companies with less than stellar credit rating, you know, who have real risk to their credit, but can still get access to capital. That was the great innovation of Mike Milken at Drexel Burnham, providing capital to companies that otherwise wouldn't have been able to get it and doing it in the junk bond market by issuing these bonds publicly to a large extent.

36:02But they don't have AAA credit ratings. They often don't have investment-grade credit ratings. They have below investment-grade credit ratings, which means that they have to pay a higher rate of interest to borrow the money than, say, Johnson & Johnson would have to pay or the government would have to pay, assuming we don't default on our debt or we lift the debt ceiling or we don't get too crazy, which we happen to be going through a crazy phase now, which is why everybody gets so nervous. And so when the yields in the junk bond market spike up, you really get the sense that people are really risk off, as they like to say on Wall Street, that they'll borrow money or these companies can borrow money, but they really have to pay up for it.

36:51So what happens in the junk bond market can tell you so much about how people are feeling about risk. And last week, the yield in the junk bond market, which was already trending up because interest rates had been rising and people were worried about the economy generally, had been about 7.5 percent, leapt up to 8.5 percent like in a day or two. I mean, another huge jump in a very short period of time. So people are really nervous. And that's just the average junk bond. Some junk bonds are yielding, you know, 20 percent or more. There's a general sense that last week that either intentionally, you know, using the debt markets as a weapon.

37:41And that is people are fed up with Trump and these sort of what they believe are reckless, mutually, you know, assured mutual destruction tariffs. and that they went, the Japanese and potentially the Chinese, went into the bond market, did some short, you know, fairly abrupt, pulsed sales that took the tenure up to basically say, hey, boss, you fuck with us, we're going to fuck with you. Do you get the sense that's what happened? Personally, I think that's what happened because it's a way to quietly fuck with us, if you will. You know, fuck with us. You know, you're going to do these tariffs. Yes, we'll match you tariff for tariff.

38:24We'll play that long game. We've been around for 5 ,000 years. You've been around for 250. We'll play that long game with you. And in the meantime, we'll drive up the cost of money. Not only, you know, because if you drive up the cost of the government borrowings, which is exactly the opposite of what, you know, the Trump administration was hoping would happen, then it costs more to refinance. It drives up your budget deficits. It drives up the cost of all other borrowings by corporations and individuals because bonds are priced off of a spread to treasuries. And while that spread had narrowed, then in the last few weeks, it's widened again.

39:03So that's what I thought happened, Scott. And it was also like a signal that, you know, you need to refinance$6 trillion of treasury securities by June, we may not play in that, you know, Scott Besant, the Treasury Secretary. So, you know, good luck trying to refinance at anything like, you know, four and a half percent rate. It might be even higher. But, you know, the other day I noticed that Besant came out and said that's not what happened. Personally, I'm not sure I believe anything that comes out of the Trump administration. So I don't know that I believe that. But something has to account for the largest move up in the 10-year bond in 37 years.

39:39If you're a banker, if you were hired by the Chinese Communist Party, if you were hired by the CCP with the mandate of quietly, elegantly devastating the U.S. economy. I don't tell if this is going to be a question or a comment. Well, most of my questions are comments, just disgust. That's right. I think that Trump, I'll put forward a thesis, so Phil and I are friends. I think the Trump administration has vastly overplayed their hand and has absolutely no sense of how powerful or vulnerable we are. That if China wanted to, they could seriously fuck with us. That they could go into the market, sell their$700 billion in treasuries and spike the 10-year and maybe inspire just like a crazy panic here.

40:27But they're not stupid. They realized that if they kneecapped their third biggest partner, trading partner, behind the EU and Asian nations, that would be bad for them. So they're showing more restraint than we are. Am I overestimating, underestimating their ability to wreak havoc on our economy, given that they're now kind of, I think, one of our largest creditors? Yeah, I think they're our third largest creditor, with Japan being, I think, a bit bigger. so the two of them could certainly subtly send a message and you're right you know you don't want to dump your 760 billion worth of treasury securities because that you know just like you wouldn't dump you know your big position in in of stock in a company uh without a you know proper underwriting or dribbling it out over time because that'll drive the price down uh and you know you you won't obviously get as much for them.

41:27But I think it was a very effective signal. Yes, the Americans buy a lot of goods from the Chinese. But, you know, look, they just said, we're not going to sell you any more rare earth minerals. So they control the rare earth mineral market. And we need those rare earth minerals for all sorts of things. It's like, electric cars, for starters. So that's another way that they can be very effective in getting their message out. So to get back to your original observation, yes, of course, it's Trump. He's overplayed his hand in the most ridiculous conceivable way possible. I mean, even if you were like a Hollywood script writer, you could not possibly imagine this kind of scenario that Trump has come up with to, you know, destroy or to begin to destroy the confidence that people have in our capital markets, which is, you know, like you've talked about so often, Scott, you know, with universities are, you know, one of our greatest American assets.

42:36Another one of our great American assets is our financial markets. You ruin those, you ruin the confidence that people have in those financial markets, you know, it's a self-inflicted wound. We'll be right back.

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45:59We're back with Prof G Markets. You know, you talk about the idea that what we're seeing in the surge in these yields is a result of an action from the Chinese government, maybe the Japanese government, to fuck with us, as you said. And I feel like these are the two options here. It's either this one-off event-driven situation where the Chinese government has said, hey we're gonna we're gonna dump our treasuries today just to remind you that you can't fuck with us or it is a larger and more structural change where the entire world is turning away from the u.s debt markets from away from u.s treasuries much like they're turning away from the u.s stock market.

46:45And in that case, what we could see is higher yields for even longer. And I think those are two very different paths, right? In one case, the yield spikes up and then it comes back down. In the other case, it continues to slide up and up and up. One is more of an one-off event, and the other is a structural change that is going to last for a long time. I'm wondering, in your view, which path you consider to be more likely? Is this just, you know, premature trying to intervene with Donald Trump? Or is this a structural change and the world is turning away from U.S. debt? You know, honestly, both things can be true.

47:27I think both things can be happening. If you look at the 2008 financial crisis, it was caused by a huge flaw in the architecture of Wall Street. This whole idea that depository institutions, whether consumer deposits or institutional deposits, you know, were borrowing short and lending long and, you know, giving creditors. I mean, Bear Stearns at the end was borrowing in the overnight repo market, basically giving their creditors a vote every day, every night about whether to do business with them anymore. And finally, in March of 2008, they said, you know, enough, I'm not doing this anymore. I'm not rolling over the$75 billion of overnight repo that you want.

48:19And basically, you know, you're out of business. Same thing happened with Lehman, Merrill, almost happened with Morgan Stanley and Goldman Sachs. So that is an inherent flaw in the fractional banking system, in our banking system generally. We saw it again with Silicon Valley Bank and Republic Bank. So we have a basic flaw in the architecture of the system. So that's why that happens. And that's why historically there's been financial crises in this country, usually once every 20 years. As a society, we've said, OK, we can live with a blow up once every 20 years because, you know, we like banks and private banks.

49:00And if we didn't have them, our economy would basically be tiny and we wouldn't have the dynamism that we do in the economy, generally speaking. In 2020, we had the pandemic, which was an exogenous factor, freaked everybody out. Economies got shut down all around the world. Concern for a recession. The Fed had to jump in and flood the zone again. And then in 2025, April 25, we have the actions of a single madman who happens to be in the White House who can, by executive order, thanks to Congress's inability to seize back that right to implement tariffs or not. I'm still wondering why they haven't seized it back.

49:49But they've ceded this to the executive, and he's just going hog wild with it, loving being the center of attention, as we know. He himself is the one who is causing these fluctuations in the markets, this loss of confidence. So people are like thinking to themselves, this mad king, we don't have a parliamentary system. We can't vote him out of office. We can't have a vote of no confidence. We can't impeach him. We tried that twice. That doesn't seem to work. We're stuck with this guy for four years. So you're asking if this is a longer-term situation. The answer is as long as Donald Trump is in the White House and Congress does not take back the power of the tariffs, which is rightly theirs, which they don't seem to be in any hurry to do, this is why there's this massive loss of confidence.

50:43And, you know, once that confidence is lost, especially when it's a factor driven by this kind of a factor, it's going to be very hard to get it back. Not impossible. We got it back after 2008, even with the architectural flaws in the system. but this is such a self-inflicted wound. It doesn't have to happen. A normal person might say, I had this idea. I was wrong, and now I'm going to correct it because I've seen the damage I've done. But we're dealing with somebody who never admits that they're wrong and will never do something without trying to save face. And I don't know how you save face in this situation without just sort of abandoning the whole stupid idea to begin with.

51:30The big question is ultimately, okay, then where does all the money go? Like, I think we could reframe it not necessarily in terms of alpha, but just as a basic question. You know, if capital is leaving the U.S. stock market, it's also leaving the U.S. bond market, it's also leaving the U.S. dollar. I mean, we've seen the dollar at a three-year low compared to the euro. Then it has to go somewhere else. And I think the question we have to address is, where will the money go eventually if that rotation is to fully materialize? Does it go to Europe? Does it go to China or to gold or maybe even to Bitcoin?

52:08Maybe to other foreign debt markets? If you had to make a very long-term prediction as to where the money ultimately goes if this rotation materializes, what would you predict? This is not completely black and white. There's a lot of shades of gray here. I mean, the money isn't leaving our bond markets or even our equity markets. What's happening is everything's being re-rated. Everything's being repriced. So you can still get capital, which is why we're not yet in a credit crunch or credit freeze. You can still get capital. It's just going to cost you a lot more. you can still invest in uh nvidia you're just gonna it's gonna cost you a lot less so i mean uh as howard marx uh said uh the great uh distressed bond investor he said you know if suddenly you you go into uh bloomingdale's and everything's 25 off uh you're not going to run of the store and say, oh, my God, I'm not going to buy anything.

53:15Everything's 25 % off. You're going to say, oh, let me get out my shopping cart here and pull as much as I can that I wanted to buy and put it in there. So, you know, the time to back up the dump truck in the equity markets is when there's a major correction, which is, you know, why Warren Buffett moved into cash in such a big way at the end of last year and the beginning of this year, and now has like$350 billion of cash. You know, he's the only, if you look at the billionaire list, the Bloomberg billionaire list, which I love to look at, he's the only billionaire, I think, in the top 10 whose net worth has increased since the first of the year, and he's up like$25 billion because he's sitting on this pile of cash that's earning whatever it's earning, 4 % or 5 % in the bond market.

54:03So as usual, he's much more brilliant than everybody else, even though he's 92, 93, 94, not being ageist here, Scott. But I think that, you know, it's just, we've got the for sale sign on and you can't catch a falling knife. So you have to be careful. You know, it could go, it could get worse. But basically the message always has been in the past when markets correct, I always say that's a good thing. And that's a time to invest. So I think the majority of the people, at least the circles we run in, think that this is, one, bad. But two, a lot of the damage has yet to be felt. Now, obviously, we see the markets because they get marked every day.

54:47But a lot of this damage, the way I would describe it is Trump pausing the tariffs has just pulled the knife halfway out of the back of the economy. But the damage is going to take years to heal. Any sense for where the next manifestations of this damage will pop up. Is it hiring? Is it more market tumult? Is it earnings calls? Is it reduction in tourism? Like, what are you waiting on for sort of the next car to be turned over? Well, I think we're already seeing the reduction in tourism into this country from all over the world. Yeah, it's huge. It's fascinating, really. I've never seen anything like that.

55:26You know, the bankers I talk to, the M &A bankers I talk to, who are talking to, you know, gobs of CEOs, they're worried about earnings in the third and fourth quarter. Yeah. Because they see, you know, inflation rising, you know, tariffs being on, everything costing more, demand will start to, you know, be affected, and their earnings will be affected. That, you know, people like to say, well, the stock market isn't Main Street. And I get that concept, but it actually is related to Main Street in the sense that it's related to corporate earnings, which of course is related to Main Street. So there is very much a relationship between the two.

56:13And as we know, the market, the stock markets especially, are forward-looking. And I think part of the reason we've lost this 10 or 15 percent so quickly is because investors are saying, hey, you know, these tariffs and the result of them, this loss of confidence and people holding onto their wallets, we are a consumer-driven economy. And if the consumer closes the wallet, you know, we're going to see a decline in earnings in the third and fourth quarter. And that's what I think CEOs are expecting. And that's why you're not seeing any M &A business on Wall Street or much financing business. You know, all this anticipated regulatory relief that Trump was going to usher in is all for naught now because, you know, he's screwed the pooch by destroying the confidence that we had in the markets and that corporate CEOs had in their own businesses.

57:09And they're just not going to do things when they don't know, you know, where all this is going to settle out. William Cohen is a New York Times bestselling author, financial journalist, former M &A banker, and a founding partner of Puck, where he writes about what's really happening on Wall Street. I love Bill's newsletter. I highly recommend you go subscribe to Puck. It's really, it's really informative. And he keeps things spicy, which I appreciate, especially in financial news. Bill, this was a pleasure. Thank you so much for joining us. Thanks, Bill. Thank you both.

58:14you help me in kind reunion as the world turns and the dark flies in love

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